Annuities U-turn

...protecting our pensioners’ retirement funds

After a lifetime of saving up their retirement funds, around 5million pensioners in the UK have been told by the Treasury that they won’t be able to swap their annuities for a lump sum.

Under George Osborne’s pension reforms, if pensioners didn’t want to keep their annuities (purchased before the pension flexibility reforms introduced on 5th April 2015) they had the option of swapping them for a lump sum instead. In a controversial U-turn, the Treasury has recently announced that they’ve decided to scrap these plans.

Breaking a promise

The news has come as a shock to some of the 5million pensioners who were hoping to exchange their annuities. Responding to criticism about breaking its promise, the government has argued that they’ve stopped pensioners from being exploited by taking this step.

Ros Altmann, a former pensions minister, commented:

“This is going to be really disappointing for all those people who have desperately wanted to get rid of annuities which they were forced to buy and which were often not sold properly in the first place.”

“Now these savers will be stuck with these deals for life. The government got their hopes up and many people will be very upset.”

What is an annuity?

During your working life, you’ll most likely be contributing to your company’s pension scheme in the hopes of building a retirement nest egg.

When you eventually retire, you have the option of buying an annuity, which is an annual retirement income that is paid to pensioners for the rest of their lives. Before the new flexibility options were brought in, this was the only option for retirees to generate a regular income, unless they had significant pension wealth (typically above £200,000) where income drawdown was also a consideration.

Following further changes to pensions in 2015, pensioners no longer have to use their accumulated pensions to purchase an annuity and now have the freedom to choose how they structure the income they need from their funds.

These reforms, however, failed to include those who had already bought an annuity –

some of these pensioners were the victims of mis-selling, whilst others only had small pensions and didn’t get much income.

Minimising the risks

But, some of the 5million pensioners who didn’t want their annuities were given a glimmer of hope when the government announced that the freedoms introduced in 2015 would be extended to them from April 2017 onwards.

It soon became apparent that the government’s plans to introduce this were not well received by the pensions industry, with only 2 in 10 major insurers suggesting that they’d be willing to buy the annuities back. According to the Treasury, this increased the risk of pensioners being stuck with unfair deals driven by a lack of choice and competition, which is why they decided to scrap the policy.

Simon Kirby, Tory economic secretary to the Treasury, said:

“It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited.”

“Pursuing this policy in these circumstances would put consumers at risk – this is something that I am not prepared to do.”

“Understandably, this is a difficult situation for both the government – which is trying to minimise the risks some pensioners might face – and some of the pensioners who were hoping to have more say over their retirement funds.”

“For some of my clients, annuities can be a suitable option, as long as they feel that the income they are receiving for their pension pot is good value and they are aware of how long they may have to live in order to receive a return of capital and the appropriate options have been included.”

“Unfortunately, this isn’t the case for many pensioners, who may not have been given the right information prior to purchasing an annuity, or did this directly themselves through their pension provider who did not offer a competitive level of income for the lump sum that they were receiving.”

“The best solution would be for the government to consider putting a regulated framework in place, whereby individuals can receive more advice on buying and selling their annuities and the options now available to them, which will enable them to make an informed decision.”

“Many of the issues surrounding the poor value that annuities offer and their perceived unsuitability are due to a lack of information and advice available to retirees when making their decisions. Sadly, the pension providers themselves exacerbated this situation prior to the new options being introduced.”

“If you have been affected by this announcement, or you know someone who this affects, and you’re not sure about what you can do next, I can walk you through your options and help you get your finances in order.”

Disclaimer

No information on this website shall be construed as legal advice and information is offered for information purposes only. You should always seek advice from an appropriately qualified solicitor on any specific legal enquiry. **Call charges may vary. Calls from mobiles may vary depending on your service provider. Calls to or from our legal helpline may be recorded for training and monitoring purposes. External links are provided for your convenience, but they are beyond the control of Simpson Millar LLP Solicitors and no representation is made as to their content. Use or reliance on any external links and the content thereon provided is at your own risk. Full terms of use...

Simpson Millar LLP Solicitors is a limited liability partnership registered in England and Wales OC313936. Our registered office is: 21-27 St Paul's Street, Leeds LS1 2JG. VAT number 823 8367 14. A list of members is available from our registered office. We use the term 'partner' to refer to an employee of equivalent standing to that of a partner in a partnership. Authorised and Regulated by the Solicitors Regulation Authority: Registration No: 424940. Simpson Millar Financial Services Ltd is a wholly owned subsidiary of Simpson Millar LLP and authorised and regulated separately by the Financial Conduct Authority. FCA registration number: 589130